Optimal Portfolio Rules for an Integrated Stock Bond Portfolio
In this paper we critique the famous separation theorem (or mutual fund theorem). We show that, if a portfolio contains stocks and bonds, then bonds generate a dependence of optimal portfolio composition on the investorsÕ temporal horizon. This dependence makes the theorem inapplicable if all investors have different time horizons. Thus, we state a new theorem explaining the behaviour of financial advisors recommending higher percentage of bonds for more risk averse investors. This new theorem considers the separation theorem as a special case. Finally, we propose a solution to the so called "equity premium puzzleÓ.
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